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Angelien Kemna, chief investment officer of the Netherlands-based APG Group, believes in “controlled simplicity”.
Sadly for her, politicians and regulators seem not to subscribe to the concept. Increasingly, Ms Kemna’s day-to-day duties of managing €343bn on behalf of 4.5m pension scheme members are complicated by everything from financial transaction taxes and the compulsory central clearing of derivatives, to limits on bonuses and political opposition to raising retirement ages.
Plans by 11 eurozone countries to impose a financial transaction tax on equity, bond and derivative transactions could take an “obscene amount of money” from pensioners and force some companies to seek listings outside Europe, Ms Kemna fears.
Likewise, she admits to being “pretty scared what the fallout will be” from a global regulatory push to force a host of derivative transactions to be cleared through central counterparties (CCPs), rather than routed through the bilateral over-the-counter market.
The move, designed to reduce risk in the financial system, will force market participants to tie up capital in order to post collateral with the CCP, predominantly in the form of government bonds.
In Europe, pension funds have been given an exemption from mandatory central clearing until 2018, but Ms Kemna fears it will be “extremely costly” for APG to continue to hedge its interest rate and currency exposure via bilateral deals with banks. It will effectively force pension funds into the margin-heavy centralised system.
“We are the most creditworthy [element of] the system, but we have to pay the same even as highly leveraged hedge funds,” she says. The margin that must be posted is determined by the size of the trade, not the riskiness of the participants.
“The cost for our beneficiaries will go up dramatically because we are forced to hedge; the same with insurance companies. We were not invited to the [negotiating] table to say it is very costly and unfair to long-term investors who need to hedge. We are talking billions of euros. I think it is totally unreasonable.”
Ms Kemna has her doubts whether CCPs will be safer than the current model.
“With a bank you are assured what happens with the collateral. If the CCP can use it for any other purposes, that is not safe and we are not happy campers.”
Another strand of the post-crisis regulatory clampdown is acutely felt at APG, which manages the assets of Stichting Pensioenfonds ABP, at €297bn the world’s third-largest pension fund, and six other Dutch schemes.
The Netherlands is due to impose the strictest cap on bonuses for financial services staff in Europe in January 2015, limiting variable pay to a maximum of 20 per cent of fixed pay.
APG’s board received variable pay of between 76 and 123 per cent of base salary in 2011, but Ms Kemna says bonuses have already been cut to below 20 per cent for all board directors and members of its management team.
“We are a pension fund asset manager, we realised that we have a role in society,” she says. “Since society is overexcited about [the bonus issue], it is just not worth its while. We got hammered all the time. If the discussion went on, we would lose credibility.”
Nevertheless, Ms Kemna says senior “risk-taking” portfolio managers can still qualify for bonuses of greater than 20 per cent. She remains opposed to the restriction in principle, with fixed salaries likely to rise to make up for lower bonuses.
“Therefore it is stupid, because it increases our costs.”
Even APG’s asset allocation is feeling the impact of political decisions. As a manager of long-term pension money, APG is just the sort of asset owner cash-strapped governments are encouraging to finance infrastructure projects.
Indeed, the Dutch group tendered for an offshore wind project in Mexico that was cancelled “at the last minute [when] the government pulled the plug,” as well as a scheme in Norway, where the pricing was later changed by the government.
“The money is out there [for governments] but it is about the conditions. We are wary; it is not at any price.”
Like many investors, APG is more interested in up-and-running “brownfield” infrastructure projects than new “greenfield” ones. Ms Kemna argues that exposure to the latter can be gained more efficiently via equities.
Ms Kemna is, however, a big fan of “smart beta” – strategies based on benchmarks that aim to outperform the traditional market capitalisation-weighted model. APG is running €40bn in this manner, half of its exposure to developed-world equities.
She says APG’s smart-beta portfolios have, to date, met or exceeded the company’s target of outperforming market cap-weighted indices by 50 basis points a year after costs.
Whether this will continue is unclear. Ms Kemna notes that the excess gains available from some smart-beta approaches, such as momentum, have fallen as increased awareness has arbitraged the opportunity set away. She fears this fate may spread to minimum-volatility approaches, despite their strong long-term record.
Nevertheless Ms Kemna says APG might well hold on to its “min vol” portfolios of defensive, lower-risk stocks even if they ceased to outperform, calling such holdings a “strategic, timeless choice”.
“What really matters for us is that we have to provide €800 a month of pension money. That is what it is all about. We want to have a steady future income stream for those people on whose behalf we invest this money, not necessarily the most money.”
Unlike pure defined benefit pension models, the Dutch system makes an explicit link between the health of a fund and retirement incomes. In April, ABP was forced to cut payments to pensioners for the first time, by 0.5 per cent, because its funding level was ruled to be too low by the central bank.
From October, ABP’s coverage ratio had climbed to 106.2 per cent, above the 104.2 per cent threshold it needed to reach at the end of December to avert a second pensioners’ haircut.
Ms Kemna believes ABP and the other schemes APG manages are now “out of the woods”, as “interest rates have started rising and will continue doing so,” increasing the rate at which future liabilities can be discounted.
Nevertheless, she fears rising longevity will continue to weigh on all Dutch pension schemes, and is frustrated by the measures being taken to address this.
“As long as we avoid the discussion we actively lie to the people,” she says. “[The solution is] working longer or paying more. It should not come from investments. I would never want to increase the amount of equities or equity-like investments to speculate our way out of this.”
1981 Master’s degree, Erasmus University, Rotterdam
1988 PhD in business econometrics, Erasmus
1988-92 Associate professor of finance, Erasmus
1992-2001 Director, investments and account management, global equities portfolio manager and head of quantitative research, Robeco Group
1993-99 Professor of financial markets, University of Maastricht
2001-04 Global CIO, ING Investment Management
2002-07 Chief executive, ING Investment Management Europe
2007-11 Professor of corporate governance, Erasmus University
2009 CIO, APG Group
Founded 2008, when it was spun out of Stichting Pensioenfonds ABP
Assets under management €343bn
Number of employees 4,000, including 600 investment professionals
Offices Heerlen (headquarters), Amsterdam, New York and Hong Kong
Ownership ABP (92.2 per cent), Stichting Sociaal Fonds Bouwnijverheid (7.7 per cent), the pension fund for the Dutch construction sector
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